Monday, April 20, 2015

As Newcastle United’s passionate supporters endure yet
another frustrating season, it all seems a far cry from the days when they were
known as “The Entertainers”. Mid-table mediocrity appears to be the pinnacle of
the club’s ambition, while a cup run is to be frowned on, as it might weaken
the chances of remaining in the top flight, where they can continue to benefit
from the lucrative Premier League TV deal.

Most of the fans’ displeasure is aimed at owner Mike Ashley,
a highly successful businessman who has turned around the club financially, but
who clearly favours profit over performance. He has made a series of strange
choices, such as hiring his mates Dennis Wise and Joe Kinnear, that have slowly
drained the supporters’ spirits, leading to widespread protests and even an
organised match boycott.

The stark contrast between the depressing displays on the
pitch and what the club described as “strong results” off the pitch have not
helped matters, as these only underline the lack of investment from the board.
The accompanying statement from managing director Lee Charnley was hardly a
battle cry: “I am pleased to report a positive set of results which confirms
the healthy financial position the Club now finds itself in and is a reflection
of the prudent and measured manner in which we operate.”

In any case, it was an impressive achievement for Newcastle
to nearly double their profits from £9.9 million the previous season to £18.7
million in 2013/14, driven by record revenue of £130 million. The £34 million
(35%) revenue increase was largely due to the additional money from the new
Premier League TV deal, while there was also useful growth in commercial
operations. Profits on player sales were £3 million higher at £14 million, mainly
from the sale of Yohan Cabaye to Paris Saint-Germain in January 2014.

The revenue growth was partially offset by a £29 million
increase in expenses, mainly due to player costs with the wage bill up £17
million to £78 million and player amortisation £7 million higher. Other
expenses also rose £5 million.

Thanks to the new TV money, most Premier League clubs
actually reported profits in 2013/14 with only five clubs making a loss. That
said, Newcastle’s post-tax profit of £19 million was the fifth highest in
England’s top tier, only surpassed by Tottenham Hotspur £65 million,
Southampton £33 million, Everton £28 million and Manchester United £24 million.

This is nothing new for Newcastle, as the club’s stated
objective is “to achieve a sustainable financial position, able to operate
without reliance on external bank debt or additional long term financial
support from our owner and meet UEFA’s Financial Fair Play requirements.”

In fact, this is the fourth consecutive year that Newcastle
have made money and they have accumulated profits of £63 million since 2011.
The first three years of the Ashley era saw losses between 2008 and 2010, but
since then the club has been very firmly in the black.

Newcastle are one of only three Premier League clubs that
have managed to report profits in each of the last four years (Arsenal and WBA
being the other two). The Geordies’ aggregate profits of £63 million in that
period are almost exactly the same as Arsenal, who have been the poster boy for
financial success in the football world, and are only beaten by Tottenham, who
have benefited from the mega sale of Gareth Bale to Real Madrid. It’s little
wonder that supporters are enraged by this level of profit, especially when
they compare it with the absolute poverty of the playing squad.

Newcastle’s profitability is further emphasised by their
high profit margin (profit divided by revenue) of 14%, which is the fifth
highest in the Premier League, only surpassed by Tottenham 36%, Southampton
32%, Everton 23% and Crystal Palace 20%.

In fact, Newcastle would actually be even higher in the
profitability league if (once-off) player sales were excluded. Although
Newcastle made £14 million from this activity in 2013/14, this was dwarfed by
the profits on player sales made by Tottenham £104 million, Chelsea £65
million, Southampton £32 million and Everton £28 million. Without such
substantial player sales, only Crystal Palace would have a higher profit margin
than Newcastle.

That said, player sales have had a significant impact on Newcastle’s
profits over the years, contributing £117 million since 2008 and £68 million in
the last four years alone with Andy Carroll’s move to Liverpool being the
standout transfer. Newcastle would have made small losses without this activity
– until 2014.

Although these sales have helped Newcastle balance the
books, they have clearly weakened a squad that is already small by Premier
League standards. There appears to be a clear strategy of using Graham Carr’s
scouting network to recruit younger players with potential and then placing
them in the shop window before profitable sales to a larger club (or just one
with more ambition). In fairness, this approach seemed to be working when
Newcastle finished 5th in 2012, also qualifying for the Europa League, but
there has been even less investment since those heady days.

This can be seen by Newcastle’s player amortisation of £20
million, which is one of the smallest in the Premier League. As a rule, this
normally reflects low spending on player recruitment, though it should be
acknowledged that Newcastle do tend to sign players on long-term contracts,
which reduces the annual amortisation charge.

To clarify this point, transfer fees are not fully expensed
in the year a player is purchased, with the cost being written-off evenly over
the length of the player’s contract – even if the entire fee is paid upfront.
As an example, Siem de Jong was bought for £6 million on a six-year deal, so
the annual amortisation in the accounts for him is £1 million.

Even though player trading (and particularly profits from
player sales) have had a sizeable impact on Newcastle’s figures, the
improvement in the profitability of their core operations has also been
important to their bottom line. This can be seen by looking at the club’s
EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation),
which can be considered a proxy for the club’s profits excluding player
trading. This was steadily declining from 2006 and was actually negative in
2009 and 2010, but since then it has been rising and jumped from£15 million to £27 million in 2013/14
alone.

That is not too bad, but is only the 11th highest in the
Premier League and is a long way behind the top five, despite the far higher
wage bills at those clubs: Manchester United £130 million, Manchester City £75
million, Arsenal £62 million, Liverpool £53 million and Chelsea £51 million. In
other words, if player trading were to be excluded, Newcastle would not be one
of the more profitable clubs in the Premier League, which might help to explain
their somewhat prudent approach.

This is partly due to Newcastle’s seeming inability to
growing revenue under Ashley. Before the big man arrived, Newcastle’s revenue
was £87 million in 2007, which has since increased to £130 million in 2014. On
paper a 49% (£43 million) growth is reasonably impressive, but the devil is in
the detail, as this has been entirely driven by the centrally negotiated
Premier League TV deals, which have helped produce a £52 million growth in this
period. This can be seen by the leaps in 2008, 2011 and 2014 (2011 obviously
also impacted by the promotion from the Championship).

The other revenue streams have actually fallen under
Ashley’s command with match day revenue decreasing 23% (£8 million) from £34 million
to £26 million and commercial income dropping 7% (£2 million) from £28 million
to £26 million (though this was also impacted by the outsourcing of the club’s
catering operation sin 2009). To be fair, commercial income has grown an
impressive £86% in the last two years, but it still has not returned to the
pre-Ashley levels.

Given Ashley’s reputation as a smooth commercial operator,
this is highly embarrassing, especially as last year’s accounts included this
gem: “Match day and commercial revenue is a key driver, because that’s where
the club can compete with – and outperform – its competitors to enhance its
spending capabilities.”

Newcastle’s revenue of £130 million is the 7th highest in
England, which sounds great, but the problem is that it is a long way behind
the other leading clubs: Manchester United £433 million, Manchester City £347
million, Chelsea £320 million, Arsenal £299 million, Liverpool £256 million and
Tottenham £181 million. This massive financial disparity shows how difficult it
is for Newcastle to challenge at the highest level, as interim manager John
Carver acknowledged: “We can threaten the top teams, (but) we’re not going to
win the Premier League.”

However, importantly, he added: “But if we invest right, why
can’t we go after the European spots, the Champions League spots?” Some might
argue that this is another example of Carver’s unfounded optimism, but he sort
of has a point, given that Newcastle’s revenue is clearly the “best of the
rest”, ahead of Everton £121 million, Aston Villa £117 million, West Ham £115
million and Southampton £106 million.

Newcastle actually went up six places in the Deloitte Money
League to 19th, just behind Atletico Madrid (Champions League finalists,
remember) £142 million, Napoli £138 million, Inter £137 million and Galatasaray
£135 million, but here’s the thing: there are six English clubs ahead of them.
In many ways, it would be better to have less income, but be higher placed in
the domestic league, as the competition in England is much tougher from a
financial perspective. From this season 14 of the Premier League clubs are in
the top 30 worldwide by revenue, while all 20 clubs are in the top 40.

Broadcasting now accounts for 60% of Newcastle’s total
revenue, up from 53% the previous season, with match day and commercial each
worth 20%. As former manager Alan Pardew said, “The Premier League is the be
all and end all, because of the TV money.”

The new three-year deal helped increase Newcastle’s share to
increase by £32 million from £45 million to £77 million with further
improvement coming from the merit payment, as Newcastle climbed six places in
the league table. In fact, they received more money than two teams that
finished above them in the league (Southampton and Stoke City), as they were shown
live more often, which resulted in higher facility fees (25% of the domestic
deal).

The only other variable element in the Premier League
distribution is the merit payment (also 25% of the domestic deal), which
depends on where you finish in the league. Interestingly, if Newcastle had
managed to repeat their feat of finishing 5th in 2011/12 in the last two
seasons, they would have banked around £18 million extra.

All other elements are equally distributed among the 20
Premier League clubs: the remaining 50% of the domestic deal, 100% of the
overseas deals and central commercial revenue.

Of course, this is just the first year of the current
Premier League TV deal and there will be even more money available when the
next three-year cycle starts in 2016/17 with the recently signed extraordinary
UK deals with Sky and BT producing a further 70% uplift. My estimates are that
a club finishing 10th will receive around £118 million a season, which would
represent an additional £41 million for Newcastle (assuming they can again
reach these “heady heights”).

The Premier League television growth more than offset the
loss of Europa League TV money, which was worth €5.3 million in 2012/13.
However, that run to the quarter-final had also demonstrated the difficulties
of operating with such a tiny squad, as Pardew’s stretched resources meant his
team struggled in the league, plummeting to 16th place and flirting with
relegation.

The reduced number of home fixtures from no European
competition was also a factor in the 7% (£1.8 million) decrease in match day
revenue from £27.8 million to £25.9 million. Newcastle’s match day revenue is
the seventh best in England, but it is a long way behind Manchester United £109
million, Arsenal £100 million, Chelsea £71 million, Liverpool £51 million,
Manchester City £47 million and Tottenham £44 million.

This is despite Newcastle having a supporter base that is
the envy of almost every other club with an average attendance of over 50,000
being the third highest in the country, the mismatch with revenue being due to
lower ticket prices and corporate hospitality. While the club does deserve
praise for its “commitment to keeping ticket prices affordable for our
supporters”, including freezing season ticket prices for next season, it is
noticeable that most of the initiatives were only introduced after attendances
fell, as the board attempted to once again fill the ground.

Either way, since the promotion back to the Premier League
in 2010 attendances have been steadily rising and are once again over 50,000.
The loyalty of the fan base was shown by the fact that Newcastle’s crowds were
the fourth highest in England even when they played in the Championship, which
is an incredible statistic.

Commercial revenue shot up 50% (£8.5 million) from £17.1
million to £25.6 million as a result of “lucrative” new deals with shirt
sponsor Wonga and a long-term extension with kit supplier Puma. Charnley
commented: “The most pleasing aspect in this set of accounts has been the
growth in our commercial revenue and it has been our strongest year in that
respect.”

It is indeed a fine performance, especially as it followed
24% growth the previous season, but it is worth noting two points: (a)
commercial income is still lower than the £27.6 million that Ashley inherited
seven years ago; (b) it still pales into insignificance compared to the
commercial income at the top six clubs: Manchester United £189 million,
Manchester City £166 million, Chelsea £109 million, Liverpool £104 million,
Arsenal £77 million and Tottenham £45 million.

It might be argued that such comparisons are a tad
unrealistic, but it’s a similar story if you lower your sights to the mid-tier
clubs. Before Ashley arrived Newcastle’s commercial income was at the same
level as Tottenham, but the North London club has grown this revenue stream by
47% while Newcastle have fallen by 7%. In the same period Aston Villa have
caught up, while West Ham and Sunderland are much closer.

In fairness, Newcastle’s £6 million shirt sponsorship with
Wonga is only surpassed by the deals made by the top six clubs, even though the
association with a provider of payday loans at extortionate rates feels
horribly cheap. That said, the disparity is again enormous with Manchester
United earning £47 million a year from their Chevrolet deal and even Tottenham
signing a £16 million agreement with AIA.

Even though the club said that it is working hard to add new
sponsors, this is clearly challenging with the ubiquitous presence of Sports
Direct advertising that surely puts off other potential partners. This policy
reached its zenith when the famous St James’ Park stadium was officially
renamed the Sports Direct Arena, as a temporary measure to “showcase the
sponsorship opportunity to interested parties”. Although Wonga paid to have the
name restored as part of their commercial agreement, the damage was done in
most people’s eyes.

There was a significant 27% increase of £16.6 million in the
wage bill from £61.7 million to £78.3 million, lowering the wages to turnover
ratio from 64% to 60%. This surprisingly large rise is down to an additional
six months wages for six players purchased in the January 2013 window plus
bonus payments for finishing in the top ten of the Premier League.

Only now has the wage bill gone back above the 2009 level of
£71 million. There has been just £7 million of wages growth in that time, while
revenue has increased £44 million, though, in fairness, the 2009 wages to
turnover ratio of 83% was unsustainable in the long-term.

Furthermore, although the current wages to turnover ratio of
60% is “within the club’s desired range”, it is still one of the highest in the
Premier League, which is again a reflection of Newcastle’s low revenue growth.

Most clubs increased wages in 2013/14 as a result of the
additional TV money, but Newcastle’s growth was higher than most, moving them
up from 11th to 7th position in the wages league, which is where they should be
based on their revenue. Of course, they are still miles behind the elite clubs:
Manchester United £215 million, Manchester City £205 million, Chelsea £193
million, Arsenal £166 million, Liverpool £144 million and Tottenham £100
million.

However, if we compare Newcastle’s wages with their current
rivals, we can see that back in 2008 they were ahead (in some cases a long way
ahead), but the gap has dramatically closed over the last few years. Even after
Newcastle’s substantial 2014 increase, only West Ham had lower growth in that
period with the other clubs growing at a far higher rate. The 2014/15 wage bill
is also likely to fall by at least £10 million, as the performance bonus is
unlikely to be paid this season, which means that many clubs will converge on
the £65-70 million level.

Specifically, Tottenham increased their wage bill by £47
million in that period, compared to Newcastle’s growth of just £8 million,
meaning that a £17 million difference in Newcastle’s favour in 2008 has been
converted to a £22 million shortfall in 2014 (and it was as high as £34 million
the previous season).

Since Ashley’s arrival Newcastle have basically been a
selling club with many years of net sales. Although the club had a net spend of
£25 million in the two seasons following promotion, they have essentially
broken-even in the last two years. In fact, they somehow managed to go 18
months without signing a full-time professional player, which is some going
(and the height of optimism) in such a competitive league.

Unsurprisingly Newcastle’s net spend in the last two years
is one of the lowest in England’s top flight, only “beaten” by Tottenham, whose
figures were greatly boosted by the Bale sale. To place this into context, in
the same period Crystal Palace had a net spend of £52 million, Hull City £50
million, Leicester City £20 million and even Sunderland £19 million – and none
of these clubs is exactly rolling in cash.

John Carver believes that the club will spend big in the
summer: “They have to invest in the team and I have had assurances they’re
going to.” Given Ashley’s track record, the fans would be forgiving for
treating this with a degree of scepticism and it may be that any spending is
only funded by selling experienced players like Tim Krul, Cheick Tiote and
Moussa Sissoko.

Net debt has been cut by £38.6 million from £133.5 million
to £94.9 million, as the £4.5 million overdraft has been cleared and replaced
by cash balances of £34.1 million. There is no longer any external bank debt
with the remaining debt of £129 million being entirely owed to Ashley: £18
million repayable on demand and £111 million repayable after more than one
year.

Gross debt has therefore been cut by £21 million from the
peak of £150 million, but this is still £52 million higher than the £77 million
debt Ashley inherited in 2007. To be fair, the switch from external to owner
debt has saved a lot of money in annual interest payments (which were as high
as £8 million in 2008), but it is striking that none of the debt has been converted
into equity, as is the case with many football club owners, e.g. Ellis Short
has capitalised around £100 million of loans at Sunderland.

Newcastle have adopted a policy of paying transfer fees
upfront, rather than spreading payments over a number of years, so they owe
other clubs less than £3 million. In some ways, this is an admirably prudent
approach, but it does restrict Newcastle’s ability to spend more on bringing
players in. There are also £2 million of contingent liabilities, but the club says
that their criteria for payment are not expected to be met.

That said, Newcastle have been pretty good at generating
cash in the last few years with £33 million from operating activities in 2014
alone, which was boosted by £8 million from player sales. After spending £3
million on fixed assets, they had £39 million positive net cash flow. Not only
have Newcastle not required any additional financing for the last three years,
but they actually made an £11 million repayment of Ashley’s loan in 2012.

Newcastle’s £34 million cash balance is one of the highest
in the Premier League, but it is only just above Crystal Palace £27 million and
Southampton £26 million. The difference is that it feels as if those clubs have
a clear vision, while Newcastle’s strategy is much more limited.

The club have invested £29.8 million on six new players
since these accounts were finalised (though have also recouped £12.6 million
from player sales), but they have not really strengthened the squad if this
season’s results are any guide. It is likely that the remainder of the funds
will be spent on infrastructure such as the training ground.

Mike Ashley should be given some credit for stabilising
Newcastle’s financial position with the club emphasising that the owner has not
“taken any monies from the club”, which is not the case for many other owners
who happily pay themselves salaries and dividends, not least the previous Hall
and Shepherd regime at Newcastle.

Strictly speaking, it is accurate that Ashley does not
directly benefit from his acquisition of Newcastle United, but there is
substantial indirect benefit for his company. For example, the accounts note
that the club purchased £2.8 million of goods from Sports Direct (up from £0.8
million), but more importantly the stadium is absolutely plastered with his
company’s branding.

"Goodbye Krul World?"

In the past, the club has argued that this free advertising
is worth less than the savings made from removing the requirement to pay bank
interest, which may well be true, but the argument feels as tacky as, well, the
products in Ashley’s retail outlets. Now it’s strictly business, so much so
that they might as well be playing The Manic Street Preachers’ “You Stole the
Sun from My Heart” over the stadium’s PA system.

Back in the dark days of the 2008/09 season Ashley twice
tried to sell the club, but he no longer seems to be so keen to make an exit.
Last year he said he would not sell “at any price” until 2016 at the earliest,
but it’s difficult to believe that there isn’t a price that might tempt him.

He is certainly under no immediate financial pressure to
sell, as his net worth was up to £3.75 billion, according to the 2014 Sunday
Times Rich List. That said, the club is now a far more attractive prospect to
potential investors, as it is more financially stable and has the bonus of the
amazing new Premier League TV deal on the horizon.

"When we was Fab"

The financial improvement is no small achievement and
supporters only need to look at Sunderland to see how big spending does not
guarantee success, but there is the nagging feeling that Newcastle should aim
higher. If they had ploughed back the £60+ million of profits made over the
last four years into the playing squad, then they would have had a fighting
chance of competing at the top end of the table instead of languishing among
the also-rans. As The Ruts so memorably sang, when “you’re in a rut, you gotta
get out of it.”

The ultimate goal of a football club is not to make profits,
but to challenge for trophies. The Champions League might not be a realistic
objective, but a club like Newcastle should be comfortably finishing in the top
eight every season. Even if you consider Newcastle to be a purely business
proposition, it is not enough to make profits without investing in your assets
– and that means the playing squad, which requires a significant overhaul.

The former Newcastle board got many things wrong, but it is
difficult to argue with the strategy expressed in their last annual report,
which was “to secure the club’s position among the top teams in England and
compete in Europe on a regular basis. Success on the pitch brings financial
reward in terms of enhanced gate receipts and increased broadcasting and other
revenues.”

The big question is whether Mike Ashley is the man to
deliver this virtuous cycle?

Tuesday, April 14, 2015

Being a Tottenham supporter must be a pretty good test of
whether you are a glass half-full or glass half-empty type of person. On the
one hand, the club is consistently at the higher end of the Premier League,
memorably qualifying for the Champions League in 2010 and only missing out on a
technicality two years later (due to Chelsea’s European victory); but on the
other hand, it’s often a case of “close, but no cigar”.

This was once neatly summarised by Chairman Daniel Levy: “We
have come far in the last decade – we have raised our expectations from a
clubaiming to be in the top half
of the table, to competing in Europe each season – to the point at which we
find ourselves disappointed if we don't make Champions League.”

Tottenham’s search for success in recent times cannot have
been helped by the constant management upheaval with the club parting company
with Harry Redknapp, André Villas-Boas and “tactics” Tim Sherwood in the past
three seasons, before settling on the current incumbent Mauricio Pochettino. It
will not have escaped the supporters’ attention that all this tinkering at the
top has only resulted in worsening league positions: 4th in 2012, 5th in 2013,
6th in 2014 and (currently) 7th in 2015.

Off the pitch, it’s a different story, as Tottenham reported
record revenue of £181 million in the 2013/14 season plus an astonishing
pre-tax profit of £80 million, which is not only the best ever for Spurs, but
also the highest ever recorded in the Premier League (I believe). This was
mainly thanks to unprecedented profits on player sales of £104 million, largely
due to Gareth Bale’s bumper sale to Real Madrid.

In fact, the profit before tax surged £76 million from £4m
in the previous season to that £80 million. After including a £15 million tax
charge, the post-tax profit was down to £65 million, still a substantial
increase on the £1.5 million profit recorded in 2012/13. Obviously the vast
majority of the increase was due to the £78 million increase in player sales profits
from £26 million to £104 million, but revenue also rose £33 million from £147.4
million to £180.5 million, almost entirely due to the new Premier League
television deal.

Against that, operating expenses were £13 million higher,
including a £4 million increase in the wage bill, which broke through the £100
million barrier for the first time. Player trading costs also rose £23 million
(player amortisation £13 million, impairment of player values £10 million),
while the club booked £5 million of exceptional items for redundancy costs (AVB
and his coaching staff) and onerous employment contracts.

In addition, there were a few technical movements, as
depreciation fell £8 million, largely as the previous year included a £5
million write-off for certain professional fees associated with the
Northumberland Development Project (NDP), but also a £6 million profit from
property sales (the northern end of the NDP site). Net interest payable was £4
million lower, as this year included higher notional interest on deferred
receipts for player sales.

The higher TV money has significantly improved profitability
in the Premier League in the 2013/14 season with 15 of the 20 clubs that have
published their accounts to date reporting profits, but Tottenham sit on top of
the pile with their £65 million post-tax profit, ahead of Southampton £33
million, Everton £28 million, Manchester United £24 million and Newcastle
United £19 million.

Of course, making money is nothing new at Spurs with Levy
commenting, “Tottenham Hotspur have always been run on a rational basis. It’s
one of the few clubs that has been consistently profitable.” In fact, Tottenham
have reported profits in eight of the 10 years since 2005, normally just above
break-even, but sizeable returns of £28 million in 2007 and £33 million in
2009.

Clearly much of that solid financial performance is down to
player sales with Tottenham making an incredible £267 million from that
activity over the last nine years. That’s more than a quarter of a billion as
Levy’s tough negotiation skills have certainly reaped large financial rewards,
albeit at the cost of weakening the team.

Tottenham’s last significant profit of £33 million in 2009
was also largely due to profits on player sales of £56 million with Dimitar
Berbatov moving to Manchester United and Robbie Keane to Liverpool.

The last two seasons have included a couple of mega money
sales to Real Madrid (Bale £85 million and Luka Modric £30 million), but also
highlight Tottenham’s ability to get good money for most sales, e.g. in 2013/14
Steven Caulker’s was bought by Cardiff City for £8 million, Tom Hudllestone
went to Hull City for £5 million, while the moves of Clint Dempsey and Jermain
Defoe to MLS generated around £12 million.

Unsurprisingly Tottenham’s £104 million profit on player
sales was the highest in the Premier League in 2013/14 with only a couple of
other clubs (so far) reporting more than £10 million profit from this activity:
Chelsea £65 million and Everton £28 million. When Southampton publish their detailed
accounts, they will also probably include high player trading profits, but
nothing like Tottenham’s level.

The other side of the player trading coin is player
amortisation, namely the annual cost of expensing the transfer fee of purchased
players, which is written-off evenly over the length of the player’s contract.
As an example, Roberto Soldado was bought from Valencia for £26 million on a
four-year contract, so the annual amortisation is £6.5 million.

This increased from around £25 million in each of the
previous two seasons to £40 million in 2013/14 “due to the continued investment
in the playing squad”. The total cost was actually £50 million, as there was
also £10 million for impairment with the value of certain players in the club’s
books being reduced. Although there are clear accounting criteria for
impairment, it is a little bit of a grey area, so it makes sense for Tottenham
to book such charges in a year of such high profits.

Even though player trading (and particularly profits from
player sales) have such an important impact on Tottenham’s bottom line, they
are still profitable from their core business. This can be seen by looking at
the club’s EBITDA (Earnings Before Interest, Taxation, Depreciation and
Amortisation), which can be considered a proxy for the club’s profits excluding
player trading, as this is solidly positive year after year. After two years of
decline, it rose from £19 million to £39 million in 2013/14.

That is not bad at all, but still a fair way behind the top
five clubs: Manchester United £130 million, Manchester City £75 million,
Arsenal £62 million, Liverpool £53 million and Chelsea £51 million. This is
despite the far higher wage bills at those clubs, so goes a long way to explain
Tottenham’s greater reliance on a player sales business model.

Nevertheless, revenue rose £33.1 million (22%) from £147.4
million to £180.5 million in 2013/14, almost entirely due to the additional
money from the Premier League TV deal, which helped increase broadcasting
revenue by £32.5 million (52%) from £62.3 million to £94.8 million. Match day
revenue also rose £3.7 million (9%) from £40.2 million to £43.9 million, but
commercial income fell £3.1 million (7%) from £44.9 million to £41.8 million.

Note that I am using the Deloitte Money League revenue split
here, which is different from the categorisation in the club accounts, in order
to ensure comparability with other clubs’ figures. The main difference is
corporate hospitality, which is included in commercial income in the club
accounts, but match day in Deloitte’s numbers.

The importance of TV money to Tottenham’s revenue growth is
clear: 83% (£55 million) of the £66 million increase since 2008 from £115
million to £181 million has come from broadcasting. In the same period,
commercial income rose only £8 million from £34 million to £42 million, while
match day income grew by just £4 million from £40 million to £44 million.

The major increases occurred in 2011 and 2014 in line with
the new three-year cycles of the Premier League TV deals. The rise to £164
million in 2011 was also boosted by £37 million from the Champions League
(prize money and gate receipts).

One problem with this is that all Premier League clubs are
increasing their revenue off the back of the central TV deal, while the leading
clubs are also reporting high growth in their commercial operations. In this
way Tottenham’s 2013/14 revenue growth of £33 million has been eclipsed by the
top five clubs: Manchester City £76 million, Manchester United £70 million,
Chelsea £60 million, Arsenal £55 million and Liverpool £50 million. Mind the
gap, indeed.

So Tottenham’s revenue of £181 million is the 6th highest in
England, but is a long way behind the other leading clubs: Manchester United
£433 million, Manchester City £347 million, Chelsea £320 million, Arsenal £299
million and Liverpool £256 million. After Tottenham’s recent loss to Aston
Villa, Mauricio Pochettino commented, “It is difficult to fight for the top
four. We need to be realistic.” This was probably in reference to their current
league position, but could just as easily apply to the huge financial
disparity.

That said, Tottenham are in turn a fair way above the next
clubs (Newcastle United £130 million and Everton £121 million), so they could
be considered to some extent to be “The Inbetweeners” of the Premier League,
struggling to reach the highest echelon, but comfortably beyond the chasing
pack.

Tottenham actually rose one place in the Deloitte Money
League to 13th, ahead of Schalke 04, Atletico Madrid, Napoli and Inter, but
their problem is that there are five English clubs ahead of them. In many ways,
it would be better to have less income, but be higher placed in the domestic
league, as the competition in England is much tougher from a financial
perspective. From this season 14 of the Premier League clubs are in the top 30
worldwide by revenue, while all 20 clubs are in the top 40.

Broadcasting now contributes more than half of Tottenham’s
total revenue, rising from 43% to 53% in 2013/14. Match day income is down to
24%, while commercial income falls to 23%.

Despite finishing a place lower in 6th, Tottenham’s share of
the Premier League TV money increased by £34 million from £56 million to £90
million in 2013/14 as a result of the new three-year deal. In fact, they
received more than 5th place Everton, as they were shown live more often, which
resulted in higher facility fees (25% of the domestic deal).

The only other variable element in the Premier League
distribution is the merit payment (also 25% of the domestic deal), which
depends on where you finish in the league. All other elements are equally
distributed among the 20 Premier League clubs: the remaining 50% of the
domestic deal, 100% of the overseas deals and central commercial revenue.

Of course, this is just the first year of the current
Premier League TV deal and there will be even more money available when the
next three-year cycle starts in 2016/17 with the recently signed extraordinary
UK deals with Sky and BT producing a further 70% uplift. My estimates are that
a club finishing 6th will receive around £138 million a season, which would
represent an additional £48 million for Spurs.

Given the equitable nature of the Premier League TV deal,
the real differentiator for the leading English clubs is in fact the Champions
League. In 2013/14 Tottenham were more or less the same as the top five
domestically, but their total broadcasting income of £95 million was easily
surpassed by Chelsea £140 million, Manchester United £136 million, Manchester
City £133 million and Arsenal £123 million, thanks to their Champions League
receipts.

Although Tottenham earned €5.9 million prize money (£9.2
million including gate receipts) for reaching the last 16 of the Europa League,
this was much lower than the Champions League, where the four English clubs
earned an average of €38 million, ranging from Manchester United’s €45 million
to Arsenal’s €27 million.

In 2010/11 Tottenham’s run to the Champions League
quarter-finals before being eliminated by Real Madrid generated €31 million of
prize money (£37.1 million including gate receipts). It must have therefore
been really galling when they finished fourth in the Premier League in 2012,
which would normally have guaranteed a place in the Champions League qualifying
round, only to be deprived following Chelsea’s unlikely victory against Bayern
Munich.

The importance of qualifying for the Champions League has
been further emphasised with the new deal from the 2015/16 season that will
increase the prize money by around 50% with further significant growth in the
TV (market) pool. Europe League payments will also rise, but it will still be
very much the poor relation.

Tottenham’s match day revenue rose £3.7 million (9%) from
£40.2 million to £43.9 million, but they were still overtaken by Manchester
City £47 million. This is not going to change any time soon, following the
decision to freeze ticket prices for 2014/15 season. Importantly, Tottenham
generate less than half of the revenue of their rivals Manchester United and Arsenal,
who both earn more than £100 million a season in their far larger stadiums.

In fact, Tottenham have only the 11th highest attendance in
the Premier League with around 36,000, behind Sunderland, Everton and Aston
Villa, but this is effectively full capacity with the club selling out all
Premier League home games. This underlines the need for a new, larger stadium,
which would satisfy a waiting list that has risen to over 45,000.

Levy is fully aware of this issue: “We cannot stress
strongly enough how critical the new stadium is over the long term. We have the
smallest capacity stadium of any club in the top 20 clubs in Europe, let alone
the current top-four Premier League clubs, and given we now operate within UEFA
Financial Fair Play rules, an increased capacity stadium and associated
revenues is fundamental to supporting the future ambitions and consistent
achievement at the top of the game.”

After numerous delays and rejected options, including a
possible move to the Olympic Stadium in Stratford, now that the courts have
rejected the legal challenge from Archway Sheet Metal Works, the club can
finally press ahead with its plans for a new 56,000 capacity stadium next to
White Hart Lane. This will be a massive project, costing hundreds of millions
(estimates range from £250 to £400 million) that requires Tottenham to ground
share in the 2017/18 season (Wembley and Stadium MK being the most likely
candidates), with the objective of moving in August 2018.

The cumulative spend on the Northumberland Development
Project is up to £41 million in the 2014 accounts. If the project were not to
go ahead for any reason, then many of these professional fees would have to be
written-off. Assuming that the stadium is completed, then Tottenham’s
depreciation will increase, as the asset will be capitalised once it results in
a probable economic benefit.

Tottenham will hope to emulate Arsenal’s model when
constructing the Emirates Stadium in two ways: (a) fund some of the cost by
selling naming rights – there has been talk of a £150 million 10-year deal, but
these are notoriously difficult to secure; (b) profit from residential
development because of property the club has purchased in the area.

The other area that Tottenham need to do something about is
commercial income, which fell £3.1 million (7%) from £44.9 million to £41.8
million, despite merchandising sales rising 13% to £11 million. This is one of
the lowest in the Deloitte Money League, just below Inter and Galatasaray.
Obviously Paris-Saint Germain’s £274 million is artificially boosted by their
€200 million deal with the Qatar Tourist Authority, but Bayern Munich (£244
million) and Real Madrid (£244 million) demonstrate the size of the problem.

The club might argue with some justification that this is an
unfair comparison, given those clubs’ pre-eminence in their countries, but it
is worth also considering the growth from this revenue segment of the top six
English clubs. Since 2009 Tottenham have the lowest growth, both in absolute
and percentage terms, with an increase of only £19 million to £42 million. As a
painful comparative, in the same period Arsenal have grown by £29 million to
£77 million (excluding the new Puma deal which started in July 2014) – and
that’s nothing compared to Manchester City £148 million, Manchester United £119
million, Chelsea £56 million and Liverpool £44 million.

The 2013/14 season is the last of Tottenham’s innovative
dual shirt sponsorship arrangement with Hewlett-Packard on the shirt front for
Premier League matches and AIA for cup matches (both domestic and European),
which they had first pioneered with Autonomy (subsequently acquired by HP) and
Investec. From 2014/15 AIA, an insurance services provider, will be the sole
sponsor in a five-year deal worth around £16 million a season. That’s not bad
at all, but still much lower than Manchester United’s £47 million Chevrolet
deal or (for that matter) Arsenal’s £30 million Emirates deal, while Chelsea
have recently signed a £38-40 million agreement with Yokohama Rubber.

It’s a similar story with Tottenham’s kit supplier, Under
Armour, who have a five-year deal worth a reported £10 million a year, running
until the end of the 2016/17 season. Again, that’s pretty good, but it pales
into significance next to match Manchester United’s “largest kit manufacture
sponsorship deal in sport” with Adidas, which is worth an average of £75
million a year from the 2015/16 season or even Arsenal’s Puma deal worth £30
million a year.

Tottenham’s wage bill rose £4.3 million (4%) from £96.1
million to £100.4 million, reducing the wages to turnover ratio from 65% to
56%. The wages have only risen by a cumulative £9.3 million in the last four
years, though there was a substantial increase from £67 million to £91 million
in 2011. This was partly due to the club “augmenting its squad of players to be
able to compete both at home and in Europe”, but also an attempt to retain core
players on long-term deals with higher, competitive salaries.

Despite the growth, which took Tottenham’s wage bill above
£100 million for the first time, this is still much lower than the top five
clubs: Manchester United £215 million, Manchester City £205 million, Chelsea
£193 million, Arsenal £166 million and Liverpool £144 million. Since 2005 the
gap to Arsenal has literally doubled from £33 million to £66 million.

It’s worth noting the 46% increase in directors’
remuneration from £2.5 million to £3.6 million with Daniel Levy receiving £2.2
million (up from £1.7 million), around the same as Arsenal’s chief executive Ivan Gazidis.

There has been a fairly dramatic turnaround in Tottenham’s
transfer activity in the last four seasons with net sales of £39 million,
compared to net spend of £131 million in the previous eight seasons. In
fairness, there has been over £200 million of gross spend in this period, but
on the whole Spurs have been a selling club in recent times, only splashing the
cash after a player has been sold. As Levy explained, “Tottenham is not a club
that can consistently pay £50 million for a player. We have to make our
players.”

In fact, every other club in the Premier League has spent
more than Tottenham in the last four seasons. It is particularly telling how
much more Spurs’ rivals for a Champions League place have spent in this period:
Manchester United £260 million, Manchester City £212 million, Chelsea £196
million, Liverpool £135 million and even the traditionally frugal Arsenal £88
million.

It’s difficult for Tottenham to keep up with that sort of
financial firepower and the concern must be that there will be even less cash
available to spend in the transfer market while the new stadium is being built.
Although Levy has promised to ring-fence a percentage of cash for buying new
players, Tottenham fans need only look at their North London neighbours to see
the impact while a new stadium is being financed.

The club has moved from net debt of £54.8 million the
previous year to net funds of £3.2 million, as gross debt was reduced from
£58.0 to £35.4 million, while cash increased from £3.2 million to £38.5
million. The debt comprises a £14 million Investec bank facility repayable over
five years tracking LIBOR, a £1.2 million bank loan tracking the Bank of
England base rate and £20.2 million of 7.29% secured loan notes repayable in
equal instalments over 16 years from September 2007.

The accounts also reveal how much of the transfer fees are
paid in stages with Tottenham still owing other clubs £51 million, while being
owed £73 million – though Spurs have received £33 million of the Bale fee from
Real Madrid since the balance sheet date. Similarly, Tottenham have contingent
liabilities of £15 million, which are potentially payable based on the success
of the team and individual players, but also a contingent asset of £18 million.

Tottenham have generated a lot of cash in recent years,
though this would have been even higher if clubs had paid for transfers
upfront, as we can see from the cash flow difference in player purchases
compared to the actual fees. A lot of the surplus cash is being invested in
fixed assets, essentially the plans for the new stadium and the new training
centre in Enfield.

As the club put it, “this huge investment has been funded
through equity contributions and long-term debt financing”, including a £40
million interest-free, unsecured loan from ENIC that was converted into
non-voting, preference share capital in 2013/14. However, it should be noted
that around £50 million of borrowings have been repaid in the last two seasons,
including £22.6 million on the Bank of Scotland loan facility in 2014.

There have been some rumours of an approach from US private
investment company Cain Hoy to buy the club on behalf of a group of American
businessmen, but this seems to have fizzled out. There might be more interest
in the future, as overseas investors will be attracted by the booming TV rights,
but they might be scared off by the price asked by owner Joe Lewis and the
investment required to finance the new stadium.

"Christian Eriksen - Danish dynamite"

With apologies to Spurs’ supporters, the current situation
still brings to mind the quote from the wonderful film “In Bruges”, where the
character played by Colin Farrell muses, “Purgatory's kind of like the
in-betweeny one. You weren't really shit, but you weren't all that great
either. Like Tottenham.”

Given the club's position it is perhaps understandable that Daniel Levy operates in such a prudent manner and his understated reaction to the latest results was typical: “It has been rewarding to see the progress and growth now being made on and off the pitch and we look ahead with realistic optimism.”

In the long-term Tottenham’s financial future will be dictated to a very
large extent by what happens with the stadium development, though they would obviously be
greatly helped if they could again qualify for the Champions League. The new
stadium is indeed an exciting opportunity, but as the old English proverb says,
“there’s many a slip ‘twixt the cup and the lip.”

It might seem strange to sound a note of caution after such superb financial results, but the challenge for Levy is how to drive the club forward to the next level without continually selling the club’s talent and fans will already be concerned that the irrepressible Harry Kane might be the next star to exit stage left in order to boost the bottom line.

Praise for The Swiss Ramble

"Blogger of the Year 2013 - It’s testament to the effect that Kieron has had on the blogosphere that so many fans take his word as gospel. Putting to use his career in the world of finance, his insights into balance sheets and simple explanations of complex ideas appeal to the hardcore financial whizz and casual fan alike." - The Football Supporters' Federation